The Bank of England is like the organizer of a bonfire night party. In one hand he holds the petrol can to throw it over the pile of wet logs, in the other he has a fire extinguisher ready to put it out almost at the same time.
Today’s rate hike is expected to dampen the economy and weed out stalled inflation. But the other announcement that future hikes will be limited and that peak interest rates should not go above 5% shows how concerned the bank is about the overall impact on the economy and the mortgage market in particular.
The UK is about to enter a “very challenging” two-year recession, according to the bank, the longest recession on record in official statistics, and yet interest rates will continue to rise after eight increases, including today’s jumbo surge of to 3%.
As if in acknowledgment of this difficult-to-explain stance, the Bank has done something in the published minutes of its decisions that it does not ordinarily do. To reassure markets and the public that the increases will not just keep rising and potentially wipe out all sparks of growth, future increases are expected to “peak lower than what the financial markets have priced in”.
Gov. Bailey told me that the net impact of today’s announcements could be that fixed-rate mortgage rates don’t reach the 6%-plus level that seemed likely after the mini-budget. Although adjustable-rate mortgages will automatically rise as a result of today’s rise in interest rates, fixed-rate mortgage rates are more influenced by assumptions about how rates will develop over two or five years. Mr. Bailey is steering these expectations down even if he does hike current interest rates. It’s a tricky manoeuvre.
This is a different approach than, for example, in the USA. The Federal Reserve’s rhetoric and actions have been relentless in the fight against inflation, saying they have a tendency to raise interest rates even higher than necessary because moves can always be pushed back.
But the US is in a different situation. The Bank of England’s approach reflects the fact that the British balancing act is far more delicate. The projected two-year recession would mean zero growth throughout the post-pandemic period and even through the five-year parliament after the 2019 election.
The pandemic, its aftermath, the war in Ukraine and the energy shock are of course the fuel for all of this. But as the Bank and the Government point to more pain and sacrifice for millions of households already struggling with mortgages already rising by thousands of pounds, Faced with energy and tax bills, people would be forgiven for asking: have decisions made here in the UK served to fan the flames?
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